As Labour secures its much-anticipated parliamentary majority, markets expect stability and growth, driven by cautious fiscal policies and improved UK-EU relations.
As Labour secures its much-anticipated parliamentary majority, markets expect stability and growth, driven by cautious fiscal policies and improved UK-EU relations.
5 July 2024
What now for markets after Labour’s landslide victory? It is a much-overused analogy, but Keir Starmer’s approach to this election was even more ‘carrying a Ming vase across a highly polished floor’ than Tony Blair’s in 1997 when political grandee Roy Jenkins first coined the phrase.
The Labour leader and new Prime Minister refused to rule out so much during the election period that, in theory, he could do lots of market-sensitive things quite quickly. But investors are now placing much of their faith in the character of the man; steady, predictable, and a little boring will do just fine, thank you.
Markets certainly think so. One must squint hard at the performance of Sterling and the UK bond market to discern that anything important happened overnight at all, testament to how much of the result was already priced in. UK mid-cap stocks were a little more jubilant in early trading.
Starmer’s fundamental opposition to the more left-wing parts of the party appears to be sincere, and he is aware of the mistakes made by Liz Truss in trying to do too much too quickly, so it would be a huge surprise to see reckless fiscal announcements early in this parliament.
We expect something close to the manifesto commitments on tax and spend, a small amount more tax through changing the VAT rules on private schools and rethinking the non-dom regime, a little more spending on public services through increased hiring at the NHS, schools, and the police. Neither is likely to trouble financial markets.
But a large parliamentary majority is invaluable – and given the extreme caution expressed during the run up to the election Starmer now needs to stretch his wings a little.
However, the most open area for more radical policy could center on how the Labour government builds a closer relationship with Europe. If the Rassemblement National party falls short of a majority in the French legislative election at the weekend, we could have the closest relationship between the UK and France that we have seen since at least 2016, with significant implications over the medium term for European stability.
Here's an early snapshot of what we think the impact may be for UK equity and fixed income investors.
UK Equites: A Promising Outlook
Historically, sizeable parliamentary majorities have coincided with periods of above-average economic growth. For UK equities, this victory could signal a long-awaited resurgence. The Labour Party's centrist and fiscally cautious approach is expected to provide a stable environment, allowing UK equities to potentially close the valuation gap with their European peers.
Key Sectors to Watch:
Construction: Labour's focus on planning reforms positions the construction sector for substantial growth. Investors are optimistic about the valuation and profit potential in this area.
Banks: Contrary to some concerns, there are no significant negatives for banks in our view, marking a departure from the apprehensions of the 2019 election.
Energy and Transport: While there are some challenges, such as elevated tax rates on domestic energy and rail policy impacts, these have been well flagged and anticipated. Delivering on net zero pledges may be a bigger focus given that the Green Party appears to have won close to 7% of the vote, which could result in winners and losers in the utility sector.
Additionally, the anticipated stability is likely to foster continued M&A activity and a possible uptick in IPOs. The narrative could soon shift back to monetary policy and the potential start of a rate-cutting cycle, further enhancing the attractiveness of UK equities.
Fixed Income: Stability and Fiscal Responsibility
For bond investors, the key concern remains stability. The new Labour government faces the dual challenge of reducing national debt, nearly 100% of GDP, while spurring economic growth. The bond market's decisive role in ending Liz Truss's premiership underscores the importance of maintaining fiscal discipline.
Labour's commitment to fiscal responsibility should act as a stabiliser for gilt yields. However, any signs of fiscal slippage could prompt gilt investors to demand higher yields to compensate for increased risk.
What could upset markets?
Future events such as the inaugural Autumn Statement/Budget may introduce volatility as the new government's fiscal policies take shape. Should growth rates remain stagnant, the government might have to pivot from stability to austerity, a move likely to face public resistance.
In summary, the Labour majority fosters optimism for UK equities, especially in the construction sector, while bond markets will remain vigilant in assessing the new government's fiscal policies to ensure sustained stability and growth.
With contributions from Adam Singleton, CIO of External Alpha, Solutions, Henry Dixon, a portfolio manager in the UK equities team and Jon Lahraoui, director of Discretionary credit at Man Group.
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